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On Wednesday, Prudential Financial, Inc. (PRU - Analyst Report) issued long-term junior subordinated notes worth $500 million. The issue was doubled from the originally planned $250 million. The net proceeds are expected to be utilized for improving the company’s business operations and redeeming retail medium-term notes, which carry higher interest rates.

The Notes bear a coupon rate of 5.75%. Interest on the notes will be paid on a quarterly basis. The first interest payment is scheduled on March 15, 2013.

The notes are dated to mature on December 15, 2052.

Prudential appointed Morgan Stanley (MS - Analyst Report), Bank of America Merrill Lynch, the corporate and investment banking division of Bank of America Corp. (BAC - Analyst Report) and UBS AG (UBS - Analyst Report) and Wells Fargo & Co. (WFC - Analyst Report) as the joint book-running managers for the sale. The notes are rated “Baa3” by Moody’s Investor Service of Moody’s Corp. (MCO - Analyst Report), “bbb” by A.M. Best and “BBB-” by both Standards & Poor’s (S&P) and Fitch Ratings. The outlook remains stable for all.  

Earlier last week, Prudential issued long-term callable notes worth $1.5 billion to be used for general corporate purposes.

Ratings Rationale

The ratings from all the agencies validate Prudential’s solid earnings growth and escalated operational scale on the heels of exceptional operating performance from its diversified business basket and brand appreciation. Moreover, a strong international presence provides the company with better organic growth opportunities and helps garner market share, thereby strengthening its competitive position.

Prudential’s financial leverage ratio is expected to be about 35% for 2012, up from 32% at 2011-end, but slightly down from 36% at the end of September 2012. However, about 200 basis points increase in leverage ratio in 2012 is attributable to prepayment of debt and a new accounting standard for deferred acquisition costs, which reduced shareholder equity.

Nevertheless, total leverage that includes all operating leverage stood stable at 41% at the end of September 2012 against 42% at 2011-end. Moreover, despite the lingering concerns regarding low interest rate and economic volatility, Prudential has been successfully maintaining acceptable risk-based adjusted capital (RBC) ratios.

Overall, Prudential can see higher ratings if it is able to reduce its financial leverage ratio in the mid-20% range and total leverage below 40%; GAAP interest coverage in the 8x-10x range; NAIC RBC ratio remaining near current  levels; and Japan solvency margin ratio above 700%.

Reverse rating action can follow if financial leverage ratio zooms past 35%; outstanding commercial paper constitutes above 10% of total debt on a sustained basis; a total financing and commitments ratio goes above 1.5x; and GAAP interest coverage ratio comes below 5x.

Prudential’s stock retains a Zacks #3 Rank, which translates into a short-term Hold rating.

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